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Is a big bonus FIA with a lower cap better than a higher cap product with no bonus?

Both agents and clients seem to love FIAs with bonuses. What is a bonus? It’s simply when an insurance company takes the premium paid and bonuses that value for accumulation purposes. For example, if a client paid a $100,000 premium to a product with a 5 percent bonus, the account value for accumulation purposes would start at $105,000.

The client sees it as a freebie and a way to increase the amount of money they have growing in the annuity. Of course, the annuity buyer must hold the annuity for so many years in order to have the bonus vest and be available for withdrawal purposes.

Nothing is free

In order to provide an up-front bonus, insurance companies must adjust the product so it remains profitable. This is typically done in one of two ways:
1. Extend and/or increase the surrender charges of the product

2. Lower the caps.
Is a big bonus FIA with a lower cap better than a higher cap product with no bonus?

Let’s find out by looking at what’s in the market and back-testing it 24 years (just a random time frame). As you know, caps are fairly low on FIAs right now. We’ve seen an increase lately that will hopefully continue, but only time will tell.

I’m going to compare a 5 percent and 10 percent bonus FIA with annual point-to-point caps of 5.5 percent, 6.5 percent and 7.5 percent to a 9.35 percent annual cap non-bonus/high-cap FIA that is currently out there.

As you may know, caps on most products today range anywhere from 4 percent to 6.5 percent annually on point-to-point products that typically have some kind of bonus.

The numbers below are the accumulated values assuming the product was purchased 24 years ago. While it’s not real world that the caps will stay the same, the numbers will still illustrate the point I’m trying to make — bonus products with lower caps may not be better than non-bonus products with higher caps.

5.5% annual cap5% bonus

6.5% annual cap5% bonus

7.5% annual cap5% bonus

9.35% annual capNo bonus

Account value after 24 years

$253,131

$289,639

$329,329

$391,539

5.5% annual cap 10% bonus

6.5% annual cap 10% bonus

7.5% annual cap 10% bonus

9.35% annual cap No bonus

Account value after 24 years

$265,185

$303,432

$345,011

$391,539

Average rate of return

3.67%

4.36%

4.93%

5.93%

The chart is startling. If you are selling bonus FIAs where the caps over time lag those of non-bonus products, you could be doing your clients quite a disservice.

I know it’s cool to show clients how their $100,000 account value can start at $105,000 or $110,000; but again, there is no free lunch. If your clients are going to keep their FIA for the long term, I would submit to you that most of them would be better off with a non-bonus product that consistently has a higher cap.

When using bonus FIAs make the most sense

Notwithstanding what I’ve shown you in this article, if your clients are buying the FIA so they can receive a guaranteed income benefit (GIB) for life, then using a bonus product makes much more sense.

Think about it: With a GIB rider, the client is not overly concerned about maximizing the walk-away account value. What they are interested in is the maximum GIB-for-life payment they can receive.

In this case, a big bonus product might be the product of choice. The bonus is used when calculating the “accumulated” account value that will be used to determine the GIB-for-life benefit.

There is nothing free in this world, and even though there is a 25 percent up-front bonus FIA with a GIB rider, it is the “best” product for a client a very small minority of the time, because the other product features are not very good by comparison to other lower bonus products.

To date, I’ve not seen a GIB-rider product with no bonus that was designed to provide a higher GIB-for-life payment than ones with a bonus. Therefore, if you are selling GIB-rider products, the chances are great you are selling one with a bonus (which is fine, notwithstanding the first part of this article that makes bonus products sound evil).